Illinois fails to act on public pensions in special session

SPRINGFIELD, Illinois (Reuters) - The Illinois legislature failed on Friday to take any action to fix the state's woefully underfunded public retirement system because of fierce opposition from unions and concern about the response of voters in the November elections.

Democratic Governor Pat Quinn had called lawmakers to the special one-day session to reform the most underfunded state pension system in the nation with $83 billion in liabilities.

The predicament of Illinois is the latest example of a nationwide problem of ballooning costs on pensions for government workers, such as teachers, as the population ages. State and local governments are facing tough decisions on how to cut pension costs that are taking a huge bite out of budgets.

Illinois' financial condition is among the worst in the United States, on a par with California where three large cities have filed for bankruptcy protection, citing out-of-control pension costs. California and Illinois, the nation's most populous state and the fifth most populous, respectively, have some of the lowest credit ratings among the states.

Some Illinois lawmakers had warned that lack of action to fix the ailing pension system on Friday could threaten the already low debt ratings of the state. Rating analysts who cover Illinois at Moody's Investors Service, Standard & Poor's Ratings Services and Fitch Ratings did not immediately respond to a request for comment on the Illinois legislature's inaction.

The state Senate adjourned on Friday without even voting on any pension measure.

The House of Representatives briefly debated a proposed law backed by powerful Speaker Michael Madigan to curb the pensions of state lawmakers, which account for less than 1 percent of the unfunded state liability. It would have saved only a paltry $111 million by 2045, according to state budget estimates.

While the House narrowly approved an amendment eliminating pensions for new legislators and requiring current legislators to choose between lower cost-of-living increases and state subsidized healthcare in retirement, Madigan did not call for a final vote on the bill and adjourned the session.

Republicans said the Madigan-backed bill was just a political stunt to show that Democrats had tried to do something before the November elections.

"This is a bill that provides cover in a political campaign," said House Republican leader Tom Cross.

Public opinion polls suggest most voters, who have seen private sector pensions eliminated or converted into 401(k) plans, want reform of the public pension system.

But public sector unions are the biggest paymasters of the Illinois Democratic Party.

On Wednesday, Quinn got a taste of the emotion surrounding this issue when he was heckled at a state fair by several thousand unionized state workers -- a group that helped narrowly elect him in 2010.

Unlike California, where Governor Jerry Brown is seeking tax increases to help plug a budget hole, Illinois already has played this card. It sharply raised both business and personal income taxes in 2011, which did little to improve the state's structural budget deficit and huge backlog of unpaid bills.

In April, Quinn proposed a pension fix that he said would save taxpayers up to $85 billion over 30 years and result in a fully funded system by 2042. The plan called for higher employee contributions, lower cost-of-living adjustments and a phased-in retirement age of 67 in exchange for access at retirement to state-subsidized healthcare.

Quinn also wants obligations for teacher pensions outside of the Chicago Public Schools, which account for the bulk of the state's unfunded retirement liabilities, shifted to local districts from the state.

Republicans fear a voter backlash if teacher pension costs are shifted to school districts, which could prompt higher property taxes in their stronghold of the Chicago suburbs.

Labor unions are by far the biggest campaign finance backers of Illinois Democrats, more than doubling the second-largest group, lawyers, according to data compiled by Follow the Money.